NCLT Chennai (06.02.2019) in The Resolution Professional for M/s. Orchid Pharma Limited Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others [MA/87/IB/2018 in CP/540/IB/2017] held that;
The elementary difference between section 66 and other avoidance transactions is, fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Intention is the element of difference in this section.
it is pertinent to note that the person filing this kind of application, with an imputation of fraud, has to give all the details disclosing how these Respondents Mhave committed fraud in respect to the transaction impugned before this Bench, not only that, the RP has to prove that these answering Respondents committed fraud as detailed in the application.
One more aspect that should not be ignored from reading of section 66 is, it is a qualified section with multiple caveats to invoke this subject matter jurisdiction, first, transaction shall be entered into with an object to defraud the creditors, second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor.
On the top of it, in explanation to section 66 of the Code, it has been laid down that presumption lies in favour of the director/partner that he has exercised due diligence as expected from a person carrying such function, to rebut this statutory presumption, sufficient material has to be placed.
One thing is evident from this section that burden is cast upon the RP to prove that fraud is committed by the director/partner, unless it is proved the presumption remains in force in favour of the director/partner.
Excerpts of the order;
It is an MA, the Resolution Professional (RP) filed against Hospira Healthcare India Private Limited (R1, in short called as Hospira), Kailasam Raghavendra Rao (R2- Managing Director) and Orchid Health Care Limited (R3 – an entity controlled by the promoter director of the Corporate Director- hereinafter referred as “Health Care”) u/s 45, 49 &66 of The Insolvency Bankruptcy Code (the Code) stating that Hospira acquired one of the corporate debtor units at Aurangabad and Sholinganallur, in that transaction pursuant to a Business Transaction Agreement (BTA) dated 29th August, 2012 for a consideration of USD 202,500,000 (INR 31350 crores), 3105 Crores has been retained as hold-back money to meet the contingencies as stated in the BTA raised during the enforcement of agreement between Hospira and the Corporate Debtor. As no details being furnished by Hospira regarding disbursement of 379.15crores of the holdback amount and the same being shown as written off in the books of the corporate debtor and the same being taken note of by the Forensic Auditor, the Resolution Professional has filed this application seeking reliefs as follows:
a) Declare that the Transaction constitutes undervalued transaction defrauding creditors violating Section 45, 49 of the Code;
b) Direct restoring the position as it existed before the Transaction and reversing the effects thereof in the manner as laid down in Section 45 and Section 48;
c) Direct any person (including 2nd Respondent) to make contribution to the assets of the Corporate Debtor as it may deem fit; and
d)Any other reliefs, including under Sections 46, 66 & 67 of the Code, that this Hon'ble Tribunal may deem fit.
# 2. On perusal of the record, it is evident that the sale transaction of the unit of the Corporate Debtor has never been in dispute, likewise, it is also not said anywhere that such sale is undervalued or fraudulently entered into so as to defraud the creditors of the Corporate debtor, that apart, retaining hold back money by Hospira is also not impugned as a device for appropriation of it by the answering Respondents. As said earlier, BTA in respect to this sale took place in the year 2012. Moreover, it is the case of the RP, in the year ended March31, 2015 itself, Hospira disclosed in the Notes of Accounts of its financials that payment of $60.46Crores was made to third parties on behalf of the Corporate debtor, the only grievance of the RP is, in the financials of 2015 of the Corporate debtor, hold back money payable to the Corporate debtor was shown as 105.40crores.
# 3. Subsequent thereto, RP himself says, during the financial year 2016-17, a total of 326.25Crores was received into the Trust and Retention Account (TRA maintained in CDR mechanism period) of the corporate debtor as final settlement against the holdback money and the balance 379.15Crores was written off in the books of the corporate debtor. As against this, Hospira, in the Affidavit recently filed, has disclosed that this 360.46Crores payable by the corporate debtor was paid to the creditor of the corporate debtor in the year 2014itself and it was disbursed to the Creditors of the Corporate Debtor namely SICOM and Reliance. To support this contention, Hospira has filed documentary proof reflecting payments made to the creditors on behalf of the corporate debtor.
# 4. Since this MA was filed u/s 45 stating that it's a transaction falling u/s 45 (2) (b) of the Code, it shall be cancelled by holding that the corporate debtor has kept beyond the reach (defrauding creditors as stated in section 49 of the Code) of any of the creditors entitled to claim against the corporate debtor and therefore to restore the asset lying with Hospira to the corporate debtor as if the transaction had not been entered into, when this Bench put a query to the Resolution Professional counsel asking as to how section 45 & 49 are applicable to the facts of the Case, because this transaction took place in the year 2012 and payments to third parties made in the year 2014, the counsel appearing on behalf of the Resolution Professional has categorically not pressed the reliefs sought u/s 45 &49 of the Code by limiting his case to Section 66 of the Code.
# 5. Now the point left for consideration is as to any case is made out or not u/s 66 of the Code based on the facts available on Record.
# 6. Before going into the factual matrix, we must make it clear that the word “fraud “coined in the section requires to reflect an element of intention to deceive another party by making a false promise without any intention to perform it or any such act or omission as the law specifically declares to be fraudulent. The elementary difference between section 66 and other avoidance transactions is, fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Intention is the element of difference in this section.
# 7. It should also note that either at the time of entering into BTA dated 29.08.2012 or at the time of paying money to the creditors of the corporate debtor in the year 2014 or at the time i.e., 28.06.2016, Hospira entered into the settlement agreement with the corporate debtor mentioning about hold back amount, this Code was not in existence. However since this Code has clarified to look back to the transactions falling under the respective sections, we are bound to look into the same. And we have done so.
# 8. But to prove that the answering Respondents 1-3 indulged in fraudulent trading or wrongful trading so as to defraud the creditor as enunciated u/s 66 of the Code, it is pertinent to note that the person filing this kind of application, with an imputation of fraud, has to give all the details disclosing how these Respondents have committed fraud in respect to the transaction impugned before this Bench, not only that, the RP has to prove that these answering Respondents committed fraud as detailed in the application. Here, in the application, it has been categorically stated that the information triggered the RP to file this application is the observation made by the forensic auditor.
# 9. Let us see what observations of the forensic auditor triggered the RP to file this application. The below is an extract, as per the version of the RP, made him to file this application.
“On review of latest available financial statements of Hospira for FY 2014-15, the notes to account mention about the payment terms for the business transfer agreement. The following are the extracts of the notes to accounts. A. “Hospira has advanced a loan of USD 17 Million (equivalent to INR 104.51 Crores) to an entity controlled by the primary shareholder of Orchid to fund the obligation of this entity necessary to close the transaction". B. "As part of the acquisition, the amount retained from purchase consideration is INR 1,054,000 (Rs in 000's) after adjusting for payments made on behalf'' of Orchid to various third parties, the amount retained as of March 31, 2015 is 444,901 (Rs in 000's) (INR 44.94 Crores) (Refer Note 8)”. – AXYZ currently is not privy to the names of the entities to whom "on behalf”' of OPL payments were made by Hospira. The below table depicts the discrepancy identified in the balances for retention money:
AXYZ inquired about the said discrepancy with the management of OPL. However, there was no explanation provided for the same.”
# 10. From reading of the above, it is evident that as per the financials of 2014 15 of the corporate debtor books, hold back money retained by the corporate debtor was 105.40 crores, the balance of holdback money shown as retained by Hospira as on March 2015 was 344.49 crores, the difference that was not appeared in the records of Hospira was 60.64crores. As to this difference, the auditor has observed that in Hospira financials of 2014-15, it has been disclosed that this balance of 560.46crores was adjusted to various third parties on behalf of the corporate debtor. Three things apparent out of these observations, one – Hospira paid this balance to third parties towards the debts of the corporate debtor, two – Hospira made these payments in the financial year of 2014-15 itself, three – the only needle of suspicion raised by the auditor as well as the RP in this application is those third parties names were not disclosed.
# 11. To clear this suspicion, Hospira filed documentary proof revealing SICOM writing a letter to Orchid on 3rd July 2014 stating that they issued no objection certificate to the corporate debtor to sell to Hospira the assets involved in the BTA because it has received $36,00,000 towards part payment of those dues, therefore charge against those assets was lifted. Likewise in the case of Reliance, Hospira having agreed to deliver 324, 90, 98,753 to the Account of Reliance towards the outstanding dues owed by Orchid to Reliance, Reliance gave no objection to the Corporate debtor to sell the assets involved in BTA on vacation of charge created in favour of it, it is now clear how this balance was adjusted to the debts owed by the corporate debtor. By these letters, it is evident a charge was created, to clear that charge; payments were made on behalf of the corporate debtor.
# 12. On hearing this argument, we observe that no case was put forth by the RP saying that the corporate debtor has never owed to pay money to these two lenders (SICOM & Reliance) and no case was even put forth by the RP saying nothing of it was not known to members of CDR lenders, indeed the Audit report itself shows that the corporate debtor in the financial year 2016-2017, a total of 526.25 crores was received in the TRA against the hold back money and the balance was written off in the books of the corporate debtor. As to writing off of 379.15crores, if any such write-off happened, it is an internal accounting treatment; there is no occasion to assume that Hospira could have been aware of this fact. When Hospira records are clear as to the balance is concerned, we cannot ascribe that Hospira indulged in writing off the balance of Hold back money in Corporate Debtor's books of accounts.
# 13. As we all know TRA mechanism is common feature in CDR arrangements so as to protect the lenders against the credit risk by shifting control over cash flows from the hands of borrower to an agent (TRA agent) duly maintained by lenders, here it is not the case of anybody that cash flows have not been routed through TRA agent, since it has not been refuted by the RP about setting out the consideration figures of BTA in the final restructuring scheme, that was prepared by SBI Cap on behalf of the lenders and the lenders discussing the valuation report of MITCON and accepting the same in the lenders meeting held on 5.12.2013, therefore it cannot be said today that the lenders forum has not been aware of the fact of this transaction and disbursement of the consideration came from the BTA. In this background, it is obvious that lenders should have been aware of Hold back amount also because it has been made as part of the BTA. Entire money whatever that has come to TRA Agent from the BTA must have gone to the creditors. As long as there is no specific allegation and proof showing money changed hands behind the back of TRA, it has to be presumed that all transactions routed through TRA only.
# 14. When the details of disbursement to the lenders of the corporate debtor have been given by Hospira, the counsel appearing on behalf of the Resolution Professional has deviated from the case set out in his application by arguing that Hospira has never disclosed about the remaining balance amount of $20Crores lying with Hospira, to which Hospira counsel has categorically stated that as to the remaining balance hold back money of 320Crores, it has been clearly set out in the Settlement Agreement dated 28.06.2016, therefore at least prima facie no case is found on merits to say that Hospira indulged in fraud. Because Hospira has made it clear that BTA transaction has been known to everybody and indeed the consideration to the BTA is 31348crores, this has been arrived at by the valuation done by MITCON. KPMG also conducted valuation of the asset involved in the BTA in the year 2012 itself. Therefore as against these facts, nothing is appearing that any fraud has been lurking in this transaction to defraud creditors.
# 15. As to the loan Hospira provided to one of the corporate debtor subsidiaries, i.e., Orchid Health Care Private Limited, there, money of the Hospira moved to R3, moreover, even if that transaction roped into this transaction, still we have failed to visualise any case made out u/s 66 of the Code. One more aspect that should not be ignored from reading of section 66 is, it is a qualified section with multiple caveats to invoke this subject matter jurisdiction, first, transaction shall be entered into with an object to defraud the creditors, second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor. On the top of it, in explanation to section 66 of the Code, it has been laid down that presumption lies in favour of the director/partner that he has exercised due diligence as expected from a person carrying such function, to rebut this statutory presumption, sufficient material has to be placed. One thing is evident from this section that burden is cast upon the RP to prove that fraud is committed by the director/partner, unless it is proved the presumption remains in force in favour of the director/partner. We know it is not a case goes by pleadings; it is the duty of the person asserting a fact shall prove it by showing material indicating that the business of the corporate debtor is carried out to defraud the creditors. Here it is not the case of the RP that remaining 31200 crores come into the company out of BTA has not been disbursed to the creditors; it is a peculiar case because this corporate debtor has been doing good business as on the date of admission. Therefore we are unable ascertain material that is tantamount to causing this Bench to pass orders under this section.
# 16. As to Kotak Mahindra Bank Ltd, though not required to adjudicate this issue, to sail along with the RP, it has reiterated the version the RP raised, however even in its affidavit also, we have not seen any case against the Respondents, especially against Hospira.
# 17. In view of the factual matrix set out in this case, we have not found out any material even to assume that Hospira indulged in fraud for retaining hold back amount. To prove that fraud has been committed by any person, such person has to show that Hospira has fraudulent intention at the inception to have unlawful gain, since no such material is present indicating that Hospira did something that entailed it u/s 66 of the Code, this application is hereby dismissed against Hospira as well as other Respondents with liberty to the Resolution Professional to proceed in accordance with law, if any case is independently subsisting against the Promoter-Director (R2) of the Corporate Director.
# 18. Accordingly this application is hereby dismissed as misconceived
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